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Global Markets Weekly Update: February 18, 2022
U.S.
Russia and rate worries push stocks lower
The large-cap indexes suffered their second consecutive week of declines as worries over a Russian invasion of Ukraine and high inflation weighed on sentiment. A steep decline in Meta Platforms (Facebook) weighed heavily on the communication services sector. The typically defensive consumer staples sector outperformed within the S&P 500 Index, helped by gains in Walmart and Procter & Gamble. T. Rowe Price traders noted that trading volumes were relatively light in the face of the volatility, however, as investors awaited the upcoming long weekend. Markets are scheduled to be closed on Monday, February 21, in observance of Presidents Day.
Conflicting signals on whether Russian troops were preparing to cross the border with Ukraine appeared to whipsaw markets throughout the week. Stocks fell on Monday afternoon following a CNN report that the president of Ukraine, Volodymyr Zelensky, said the government had been informed that the coming Wednesday would “be the day of attack.” The indexes then rallied on Tuesday, after Russian President Vladimir Putin said he hoped for a diplomatic solution to tensions with the U.S. and its allies and announced a partial pullback of troops near the Ukrainian border. Stocks then reversed course and headed lower again on Thursday, after U.S. officials stated that there was no evidence of a pullback and that an invasion was “imminent.”
Mixed indicators
Contradictory signs from the Federal Reserve also seemed to foster volatility. On Monday, St. Louis Fed President James Bullard told a CNBC interviewer that policymakers “surprised to the upside on inflation” and that the Fed’s “credibility was on the line.” On Thursday, Bullard said in another interview that he expected a full percentage point of federal funds rate increases by July. Bullard made it clear that his views were the consensus among fellow policymakers, however, and our traders reported that the minutes from the Fed’s latest meeting, released Wednesday, were also generally perceived as dovish. By Friday afternoon, futures markets were pricing in an almost 80% probability of only a quarter-point hike in March, according to CME Group data.
Some mixed economic data may have also lowered expectations for an aggressive rate hike at the upcoming meeting. Weekly jobless claims rose for the first time in a month, and two regional manufacturing indexes surprised on the downside. Conversely, retail sales rebounded by 3.8% in January, more than expected and the most since last spring. The sales data are not adjusted for inflation, however, and rising prices seemed to be behind much of the increase. Indeed, the Labor Department reported on Tuesday that producer prices rose 1.0% in January, the most in eight months and well above forecasts. Housing numbers were ambiguous, with starts rising less than expected but permits well ahead of consensus.
Yields fluctuate on varied signals
The unclear signals from Russia, the Fed, and the economic reports kept Treasury yields fluctuating over the week. (Bond prices and yields move in opposite directions.) Our traders reported that the interest rate volatility, along with outflows from municipal bond funds, continued to weigh on the tax-exempt bond market. However, they noted that light levels of supply provided technical support to the market.
Investment-grade corporate bond spreads moved wider during the week as headlines regarding Russia/Ukraine tensions and an acceleration in U.S. producer price inflation weakened sentiment. The primary calendar was active periodically as sentiment stabilized, and the new deals were generally met with adequate demand.
Our traders noted that the high yield market suffered from concerns about supply issues from possible sanctions against Russia or disruptions that would not only impact the energy industry but would likely have wider implications for other inputs across sectors. The primary market remained quiet, with no new deals announced. Meanwhile, bank loans experienced weakness as financial markets assessed the latest Fed commentary. Our traders noted that buyers in the loan market largely remained on the sidelines late in the week, while sellers seemed to be waiting for prices to recover.
U.S. Stocks1
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
34,079.18 |
-658.88 |
-6.22% |
S&P 500 |
4,348.87 |
-69.77 |
-8.76% |
Nasdaq Composite |
13,548.07 |
-243.08 |
-13.40% |
S&P MidCap 400 |
2,632.50 |
-14.96 |
-7.37% |
Russell 2000 |
2,009.33 |
-20.82 |
-10.51% |
This chart is for illustrative purposes only and does not represent the performance of any specific security. Past performance cannot guarantee future results.
Source of data: Reuters, obtained through Yahoo! Finance and Bloomberg. Closing data as of 4 p.m. ET. The Dow Jones Industrial Average, the Standard & Poor’s 500 Stock Index of blue chip stocks, the Standard & Poor’s MidCap 400 Index, and the Russell 2000 Index are unmanaged indexes representing various segments of the U.S. equity markets by market capitalization. The Nasdaq Composite is an unmanaged index representing the companies traded on the Nasdaq stock exchange and the National Market System. Frank Russell Company (Russell) is the source and owner of the Russell index data contained or reflected in these materials and all trademarks and copyrights related thereto. Russell® is a registered trademark of Russell. Russell is not responsible for the formatting or configuration of these materials or for any inaccuracy in T. Rowe Price Associates’ presentation thereof.
Europe
Shares in Europe fell amid continuing geopolitical tensions over Ukraine and uncertainty about monetary policy. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 1.86% lower. Germany’s DAX Index tumbled 2.48%, Italy’s FTSE MIB Index gave up 1.70%, and France’s CAC 40 Index slipped 1.17%. The UK’s FTSE 100 Index pulled back 1.92%.
Core eurozone bond yields fluctuated but ended lower overall, as fears of a Russian invasion of Ukraine intensified. Peripheral eurozone and UK government bond yields broadly tracked core markets.
ECB policymakers talk down rate expectations, but chief economist changes stance
European Central Bank (ECB) President Christine Lagarde and Governing Council members Francois Villeroy de Galhau and Pablo Hernandez de Cos emphasized that any adjustment to monetary policy would be gradual and guided by key economic data.
However, ECB Chief Economist Philip Lane changed his position on inflation, suggesting there may be a growing consensus for stimulus to be withdrawn faster than planned. Lane said in a webinar that inflation was unlikely to drop below the ECB’s 2% target in the next two years because investors, analysts, and consumers now had higher inflation expectations and structural shifts had occurred in the economy.
UK inflation, tighter labor market fuel bets on third rate hike in March
UK inflation reached a 30-year high in January and the labor market tightened further, contributing to increased expectations for the Bank of England to announce a third consecutive interest rate increase in March. Consumer prices rose 5.5% from year-ago levels in January—the highest level since March 1992—and up from 5.4% in December.
Meanwhile, the number of workers on payroll increased by 108,000 to a record of 29.5 million in January. The unemployment rate decreased to 4.1% in the final three months of last year. Labor shortages across all sectors continued to squeeze the market, with the number of open positions rising to a record level of almost 1.3 million in the three months to January. Average weekly wages, including bonuses, grew 4.3% in the final quarter of 2021.
Eurozone trade deficit balloons as energy costs surge
The eurozone’s trade deficit in goods widened by a seasonally adjusted EUR 9.7 billion in December—the most since August 2008—due to soaring energy prices, official data showed. The trade deficit with the bloc’s biggest energy supplier, Russia, rose to EUR 69.2 billion in 2021 from EUR 15.7 billion in 2020.
Japan
Japan’s stock markets generated a negative return for the week, with sentiment weighed down by geopolitical tensions in Ukraine and concerns about more aggressive monetary policy tightening by the Fed. The Nikkei 225 Index fell 2.07% and the broader TOPIX Index was down 1.95%. The Bank of Japan’s fixed rate Japanese government bond (JGB) purchase operation, which saw no offers with market yields remaining lower, was successful in capping long-term interest rates, with the yield on the 10-year JGB unchanged at 0.22%. The yen strengthened to around JPY 115.18 against the U.S. dollar, from the previous week’s JPY 115.45, on safe-haven demand amid geopolitical tensions.
Economy returned to growth in the fourth quarter of 2021; exports weakened in January
Buoyed by strong private consumption amid falling coronavirus cases, the Japanese economy grew by an annualized 5.4% quarter on quarter over the final three months of 2021, having contracted by 2.7% in the third quarter of the year. Growth came in slightly short of consensus expectations, as public investment posed a drag. Separate data showed that customs exports rose a weaker-than-anticipated 9.6% year on year in January—notably, car exports declined and shipments to China fell. Imports were up 39.6%, with the value of inbound shipments boosted mainly by higher energy costs.
In its Monthly Economic Report for February, Japan’s Cabinet Office downgraded its economic assessment; while the economy is expected to pick up, supported by the effects of policies and improvement in overseas economies, downside risks have increased due to the spread of the coronavirus, supply side constraints, and high raw material prices. The government will support the economy while paying close attention to these downside risks, and the Bank of Japan will continue monetary easing to achieve the price stability target of 2%. The core consumer price index rose 0.2% year on year in January, down from the previous month’s 0.5%.
Government to ease some of the developed world’s strictest border control measures
Since November 30, 2021, the government has banned nonresident foreigners from entering Japan, and such entry restrictions, among the strictest in the developed world, have been in place in varying forms since early 2020. However, new coronavirus cases are on a downward trend and government health experts say that the omicron-fueled sixth wave peaked earlier this month.
Against this backdrop, Prime Minister Fumio Kishida announced that the first phase of easing the border controls will begin on March 1. Foreigners, including business travelers and exchange students (but not tourists), will be admitted into the country. A cap on the number of daily arrivals will remain but will be raised to 5,000 from 3,500, and quarantine times will be shortened. Kishida said that it is not realistic to ease all border control measures at once. A majority of Japan’s prefectures remain under quasi-states of emergency.
China
Chinese markets rose as supportive comments from government officials and lower-than-expected inflation data increased investors’ risk appetite. For the week, the Shanghai Composite Index added 0.8% and the CSI 300 Index gained 1.1%. The yield on the 10-year sovereign bond ended flat at 2.814% and the yuan strengthened slightly against the U.S. dollar to 6.33 per dollar from 6.36 the prior week.
In a State Council meeting, China’s Premier Li Keqiang reportedly pledged that Beijing would swiftly roll out a slew of measures to provide stronger support to the economy, parts of which are still suffering from the effects of the coronavirus pandemic. Separately, China’s top finance minister vowed to further cut corporate tax rates, strengthen targeted fiscal spending, and tighten fiscal discipline. Finally, the head of the People’s Bank of China (PBOC) said that the central bank would maintain supportive monetary policy this year.
In economic news, China’s producer price index (PPI) and consumer price index (CPI) inflation both came in lower than expected in January. The latest inflation data and the PBOC’s dovish comments reflected the divergence in monetary policy between the China and the U.S., where the Federal Reserve is seen embarking on an aggressive hiking cycle this year.
News from developers continued to highlight the financial troubles weighing on the property sector. Shimao Group, long considered among the industry’s financially stronger players, asked for an extension to pay back RMB 6 billion (USD 101 million) of high yield trust products over three years, Bloomberg reported, citing unnamed sources. Meanwhile, Reuters reported that a Chinese court ordered the freezing of RMB 640.4 million (USD 101 million) in assets held by a subsidiary of China Evergrande Group, the world’s most indebted developer. Finally, the chairman of China Vanke, one of the country’s largest developers by revenue, warned staff members that the property sector’s best days were over and that the company was changing its business mix.
In other corporate news, Meihua International Medical Technologies Co. became the first China-based company to have an initial public offering (IPO) in the U.S. since July after ride-hailing app Didi Global’s IPO sparked a regulatory backlash in China. The medical device maker priced its IPO at the midpoint of a marketed range, raising hopes that its share sale might lead to the resumption of Chinese companies seeking to go public in the U.S.
Other Key Markets
Russian assets volatile amid uncertainty about invasion
The MOEX Russia Index rallied on Putin’s announcement of a pullback but fell to finish the week at its lowest level in nearly a month as doubts grew about whether an invasion would be stopped. The ruble also fell sharply as Russia-allied regions announced evacuation plans on Friday, according to Bloomberg, while reports of shelling exchanges between forces allied with Russia and those with Ukraine also unsettled investors.
The possibility of sanctions against Russia drove oil prices to seven-year highs, providing some support to the economies of other oil exporters while posing a challenge to importers, such as India. Possible interruptions to Ukrainian grain exports also helped push agricultural commodity prices higher.
Mexican stocks decline
Mexico’s benchmark S&P/BMV IPC stock index declined from a week earlier. The Mexican economy is expected to have contracted in January from December but likely grew for the month compared with a year earlier, according to preliminary data from the country’s statistics agency. Mexico entered a technical recession in the final quarter of 2021, when its economy shrank for the second straight quarter. Despite a tepid recovery after the coronavirus pandemic, Mexican stocks hit a record high in January as investors have favored the country’s relative stability amid high volatility in other emerging markets.
Mexican avocado farmers in a key growing region of the country found the U.S. market suddenly closed to their product after reports that a U.S. Department of Agriculture (USDA) inspector had been threatened. Imports from the part of Mexico that faced the shutdown account for 80% of total U.S. avocado consumption, according to Bloomberg. The USDA announced at the end of the week that it had resumed inspection of avocados from the Mexican region.
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